Service Tax - Reverse Charge Mechanism

Written By
Admin
on
Wednesday, 24 October 2012
|
Wednesday, October 24, 2012

Reverse charge mechanism is which has been comes
under lime light is nothing new for Service tax provide and service tax
receiver. Under the reverse charge mechanism, the service receiver is liable to
pay service tax instead of service tax provider. The service receiver will
register himself with service tax authorities and file the required returns.
The general exemption of Rs. 10 lacs is not available for that.

It is clear that the Negative list regime would
bring additional revenue to the Government. From a business perspective, the
service tax is more or less a pass through liability; however, the compliance
requirements do have an impact on the business. Further, where there is tax,
there are disputes, which add to the cost. Therefore, the point for discussion
would be to examine whether this increased revenue comes at a cost of
significantly greater compliance by industry.

In the new scheme effective from 1 July, 2012 this
list has been further extended to 10 services and the newly introduced categories
are services provided by:

arbitral
tribunal or by individual or firm of advocates or specific services by
government or local authorities to any business entity;

renting
of passenger vehicles or manpower supply services by individual, Hindu
undivided family or partnership firm to a body corporate;

There is yet another addition of two services to
this list effective from 7 August, 2012

directors
of companies;

security
agencies, under certain circumstances.

The
Government has issued Notification no 30-2012 dated 20/06/2012 where it has
given complete list of services that are covered under reverse charge
mechanism. There are certain services on which 100% service tax
needs to be paid by Service Recipient andin some instances wherein both service provider and service recipient
needs to pay service tax as per percentage mentioned in the table below:-

Sr. No.

Description of service

Percentage payable by service
provider

Percentage payable by service
receiver

1

Insurance
Agent

Nil

100%

Any
service provided by insurance agents to insurance companies who is involved
in the business of insurance will be liable for service tax without any
exemption or amount limit.

2

Goods
transport agency (Applicable to transport by road)

Nil

100%

The
reverse charge is applicable only when consignor or consignee is a factory
registered under factory act, registered society, co-operative society, any
dealer registered for under central excise act, any body corporate or any
partnership firm.

In case
of goods transport agency, a person who is liable to pay freight shall be
treated as person who receives the service.

3

Sponsorship

Nil

100%

Where
service receiver is a body corporate or a partnership firm and service
provider can be anyone..

4

Arbitral
Tribunal

Nil

100%

Where
service provider is arbitral tribunal and service receiver is a business
entity having turnover more than Rs. 10 lacs in preceding financial year.

5

Support
services by government or local authorities

Nil

100%

6

Hiring
of motor vehicle to carry passenger on abated value

Nil

100%

Hiring
of motor vehicle to carry passenger on Non-abated value

60%

40%

Where
service provider is Individual/ proprietorship/ partnership/ HUF and service
receiver is company registered under companies act 1956 or business entity
registered as body corporate in taxable region.

The
provisions are applicable to companies whether Indian companies or foreign
companies. If they receive any kind of service by hiring of any vehicle they
have to deduct service tax and register themselves with service tax
authorities.

7

Individual
Advocate

Nil

100%

Where
service provider is individual advocate or firm of advocate and service
receiver is a business entity having turnover more than Rs. 10 lacs in
preceding financial year.

In case
of advocate, they have to indentify which of their clients has turnover of
more than Rs. 10 lacs and ask them to deduct and pay service tax and for
others they have to pay service tax. It is also not clear what happen when
the service receiver will not follow the provisions. In that case whether the
service provider is liable for payment of taxes.

8

Supply
of man power or security services (wide notification no 45-46 wef
7-8-12)

25%

75%

Where
service provider is Individual/ proprietorship/ partnership/ HUF and service
receiver is company registered under companies act 1956 or business entity
registered as body corporate in taxable region.

9

Works
Contracts

50%

50%

Where
service provider is Individual/ proprietorship/ partnership/ HUF and service
receiver is company registered under companies act 1956 or business entity
registered as body corporate in taxable region.

In case
of work contract services, if both service provider and service receiver is
liable to pay tax then service recipient has option to choose the valuation
method independent of service provider.

In
works contract service there are two schemes one is composite scheme and
other is paying on actual labour and services.

The
question is in a single works contract if the contractee and contractor
choose different schemes for payment of service tax then how the ratio of 50%
will be determined, will the contract be divided in two parts or any other
criteria will be adopted? Some more clarifications are required in this regard
from CBEC

10

Import
of Services

Nil

100%

Any
servicers provided by any service provider to any service receiver.

11

Services
by director to company (wide notification no 45-46 wef 7-8-12)

Nil

100%

Whole time directors and Managing Directors of the
companies are considered as employees of the company in which they are
directors. The definition of service itself excludes services provided
by the employees to employers. Hence, there is no service tax in respect of
whole time directors and managing time directorssuch employee directors. Service tax
will apply only in case of non employee directors.

Director
have to take service tax registration number from the government authorities
in the case where reverse charge mechanism applicable.

However
the government has issued the notification and made the reverse charge liable
on some entities where turnover exceeds Rs. 10 lacs. In such cases that
entities has to register itself with service tax authorities even the amount of
service received from such persons is in hundred of Rupees. Once the person has
registered under service tax, he has to file the return half yearly even if the
taxable turnover is Nil.

The
logic behind such a move on the part of the policy maker would be to curb tax
evasion, which is prevalent in these sectors due to the reason that these are
unorganised sectors as most of the service providers are individuals and small
service firms. On the other hand, this a punitive provision for body corporate
in keeping with the amount of administrative and accounting hassles involved in
the process.

Followings are
some of the questions which may come to our mind

Who is labile?

It is well clarified that only specified services
falling under partial reverse charge mechanism Service provider shall be either any
individual, Hindu Undivided Family or partnership firm, whether registered or
not, including association of persons, located in the taxable territory. Service recipient shall be business
entity registered as body corporate located in the taxable territory. In
the case where recipient is Partnership firm, the reverse charge mechanism will
not be applicable in certain circumstances.

Does service tax
applicable for all directors of a Company?

Whole time directors and Managing Directors of the
companies are considered as employees of the company in which they are
directors. The definition of service itself excludes services provided by
the employees to employers. Hence, there is no service tax in respect of whole
time directors and managing time directors such employee directors.
Service tax will apply only in case of non employee directors.

Whether the Directors have to obtain
registration ?

Yes. However the service provided by
them was not a taxable service for the service rendered till 01 July 2012.

Whether
the directors have to issue an invoice?

Every
service provider must raise an invoice within 30 days of completion of the
service.

What if the
service provider is SSI?

Service provider
is availing exemption owing to turnover b eing less than Rs. 10 lakhs then he
shall not be obliged to pay any tax. In such a case, service recipient shall
have to pay service tax to the extent of his service tax liability to the
extent of percentage specified in above mentioned mechanism.

Point of taxation?

The service
recipient, in terms of Rule 7 of the POT Rules, point of taxation is date of
payment i.e. the invoice is issued, say in August 2012 and the service
recipient pays for the same in September 2012 then point of taxation for the
service provider will be the date of issue of invoice in August 2012 and the
point of taxation for the service recipient shall be the date of payment in
September 2012.

There may be
question arise whether the service providers whose gross turnover is less than
Rs. 10 lacs has to registered with service tax ? if they provide services
mentioned under reverse mechanism.

According to our
view, they are liable for service tax. In the reverse charge mechanism the
service receiver has to deduct service tax without any monetary ceiling for
service tax deduction.

Whether service
provider need to register in all cases?

In case of
service provider’s where 100% liabilities are lied on the service receiver,
there is no liability on the service provider, in that case there is no need
for the service provider to register with service tax authorities because no
liability is accrue and arise on service provider.

Whether Service Receiver can pay
Service Tax by utilizing CENVAT Credit?

No. It is well clarified in Explanation to Rule
3(4) of Cenvat Credit Rules, 2004 provides that “Cenvat Credit cannot
be used for payment of service tax in respect of services where the person
liable to pay tax is the service recipient.” Therefore, Service
Receiver has to make payment of Service tax in cash.